You’ve gone under contract on a small multifamily apartment deal, conducted your inspection, and the results came back bad. You’re panicking—did you waste money? Are you going to lose the deal? This situation is common in real estate, but there are proven strategies to navigate it and turn potential failure into a win.
Drawing on experience closing on and operating over 250 units, here is the essential roadmap for handling a disastrous inspection report, focusing on negotiation and protecting your cash.
1. The Foundation: Never Compromise on Location
Before diving into inspection issues, remember the golden rule: you can fix anything about multifamily property, but you cannot fix location. If you are unsure about the location before you start due diligence, do not proceed.
The pursuit of a deal based on poor reasoning —such as impatience, greed, or boredom —can be costly. Distractions destroy businesses, and boredom is a horrible reason to buy a deal. In a past experience, I personally lost $10,000 to $20,000 in legal and inspection costs because I pursued a 12-unit deal even though I knew the location was sketchy. Though there was upside and good cash flow potential, the headaches associated with the area weren’t worth it.
2. Embrace the Role of Dealmaker
Once you have invested time, energy, and money (non-refundable minutes) into a deal, you are invested. You must be a dealmaker.
When buying a business, especially from larger groups, you should mentally prepare to find things that you weren’t prepared for, as the sellers may not know everything going on with the property.
Your immediate goal after receiving a bad report is to go back and renegotiate.
Negotiate Objectively and Focus on Undisclosed Major Expenses
To avoid appearing like a novice or an amateur, do not try to renegotiate over minor issues, such as finding dirt on the ground. Instead, focus objectively on large, previously undisclosed expenses that fundamentally change the deal’s parameters.
For instance, if you discover the roofs were not disclosed as needing replacement, and the cost is significant—say $30,000 on a 10-unit apartment—that is your leverage.
The magical phrase to use when addressing the broker or seller is:
“You did not disclose this to me.”
By stating, “I love the deal, I want to do the deal, I just can’t do the deal without [the repair],” you set up the negotiation.
3. The Preferred Strategy: Demand a Cash-to-Close Credit
The ideal situation is asking the seller for a concession at closing—a cash credit equal to the cost of the major repair.
If the roof costs $30,000, you should say, “I need a credit at closing for $30,000”.
Avoid These Rookie Mistakes:
1. Do Not Ask the Seller to Fix It: Asking the seller to perform the repair themselves is a rookie mistake. When sellers are right before closing and “can smell a large payday,” they are highly likely to do a “half ass job” or “throw lipstick on a pig” because their only goal is pushing the deal through.
2. Do Not Accept a Price Reduction: Many buyers make the mistake of asking for a price reduction (e.g., lowering a $1 million deal to $970,000 for a $30,000 roof issue). While the seller prefers this because their net remains the same and it eases appraisal concerns, it works against you. A price reduction will only save you a few dollars (“pennies per month”) on your mortgage payment. You still need the cash to fix the roof.
Why the Credit Wins
A cash-to-close concession benefits you directly by reducing the total cash you need to bring to the table. For example, if you were bringing $100,000 to closing, a $30,000 credit means you only need to bring $70,000. It is crucial to remember that this credit must be held back to perform the necessary repair.
4. The Last Resort: Be Willing to Walk Away
If you cannot meet in the middle and the seller insists on an unacceptable solution (such as having “Cousin Gino” fix the roof instead of giving a cash credit), you must be prepared to say no and back out.
The strongest person in any negotiation is the person willing to walk away.
However, because finding a deal that “pencils” and finding a seller who wants to sell are difficult, you should exhaust every possible option to make the deal work before walking away. Your goal should always be to make it a win-win for everyone involved.
5. Reframing the Loss: Failure is Feedback
Walking away from a deal after spending money is frustrating. But if you do walk away, reframe your mindset: you are not starting over. You have now paid for experience—a learning lesson on what not to do. Just as Thomas Edison, after 999 experiments, viewed each unsuccessful attempt as discovering “another way not to make a light bulb,” you must understand that all failure is feedback. The only true failure is giving up or quitting. You are continuing your journey with new, valuable knowledge.
Want to learn more about navigating your first small multifamily apartment deal? Check out my free resources, the coaching program, or grab the Small Multifamily BRRRR Method book, which provides the exact blueprint for making your first deal a winner.
